Office Politics: The Growing Impact Of Campaign Finance And Election Law Regulations On Corporations

Editor: Let me begin by asking each of you to inform our readers about your professional background and your decision to specialize in campaign finance and election law.

Smith: In 2000, President Clinton nominated me to a Republican seat on the Federal Election Commission (FEC). In gathering information for the background check, I discovered that in 1979, as a senior at Kalamazoo College, I had written my senior comprehensive essay on campaign finance. So I guess it's been in my blood.

After college I worked for a small trade association as political director, which included managing their political action committee (PAC). I also served in the U.S. State Department, and then attended Harvard Law School. I spent three years with the Vorys firm, then taught election law for seven years at Capital University Law School in Columbus and wrote a book, Unfree Speech: The Folly of Campaign Finance Reform. It was through testifying in Congress that I became known in Washington, DC, and then eventually tapped for the FEC position.

When my term as FEC Chairman ended in January, 2005, I knew I would return to teaching, but I also wanted to keep a hand in live practice. The fact that Brett had joined Vorys indicated to me that the firm was determined to develop a top-flight practice in this area, and made it a natural match.

Kappel: When I was working toward my bachelor's degree in political science at SUNY Albany I had the opportunity to be an intern in the New York State Assembly - an eye-opening experience that taught me that campaign finance was an integral part of the legislative process.

I advise corporations and trade association clients on the development of government relations programs, including the creation and operation of political action committees and other ancillary tax-exempt organizations. I also counsel clients on federal and state campaign finance issues, including ethics regulations and gift rules. Companies increasingly need to understand the interplay of federal and state regulation in these areas.

I came to Vorys because the firm's government relations and lobbying practice group is active in both Ohio and Washington, DC. The firm is widely recognized for its expertise in tax-exempt organizations. And I wanted to help Vorys build a first-class, bipartisan campaign finance and election law practice.

Editor: I find it interesting that Vorys intends to develop a bipartisan practice in this area. I thought most law firms with a campaign finance/election law practice represented either Republicans or Democrats, liberal or conservative interest groups and PACs, but not both.

Kappel: Traditionally, many law firms established campaign finance and election law practices that were closely identified with one or another of the political parties. Vorys is attempting something a little different. As the political landscape changes, we want to help clients navigate this new terrain. Corporations and trade associations encounter a number of traps for the unwary. Clients want guidance and advice to avoid potential pitfalls. On the other hand, corporations must become cognizant of favorable developments that support their increased participation in the political process.

Kappel: The FEC recently eliminated a 28-year old rule that hampered fundraising by trade associations by allowing trade group PACs to collect contributions from employees of member companies through automatic payroll deductions. This is the most important regulatory change for association PACs in over a decade.

Union and corporate PACs have been able to collect this type of contribution since the Federal Election Campaign Act was enacted in 1976. The use of automatic payroll deductions, however, means trade association PACs could increase their annual fundraising by as much as 100%. Perhaps even more important, the new rule may enable both trade associations with only a few members and trade groups representing small companies to establish PACs for the first time.

Smith: Generally, my observation as a former FEC Commissioner is that corporations can, under the law, be far more politically active than they are. At the same time, many corporations get in trouble with regulations through silly mistakes that can be readily avoided. Many corporations and trade associations want to be more involved, but are afraid to do more. But I think political participation is a good thing, and can and should be encouraged in accordance with the law.

Editor: What are some of the major issues facing corporations and trade associations?

Smith: One obvious problem area is corporate reimbursements. Corporations cannot reimburse employees for political contributions. The FEC recently handed down some very stiff penalties for reimbursement schemes, even when they were undertaken without either senior management's knowledge or consent. So it is important to have good safeguards in place.

Another problem is facilitation. In one recent case, the FEC found a corporation violated the law when it forwarded individual contributions from executives to its lobbyist, who delivered them to the intended recipients. So it is important to do these things the right way.

Kappel: Following the 2004 election, both Congress and the IRS began investigating alleged partisan political activities by 501(c)(3) organizations. The IRS has said that it opened over 100 investigations of 501(c)(3) organizations and is presently pursuing over 60. The Senate Finance Committee is considering whether to prepare legislation that would tighten the restrictions on partisan political activity by nonprofits and require more reporting. If such legislation were enacted, it could have profound impact on associations that been designated as 501(c)(3) organizations.

Editor: What is the impact of the 2002 McCain-Feingold Act on corporations and trade associations?

Kappel : McCain-Feingold dramatically increased the criminal penalties for campaign finance violations, making them much more attractive cases for the Justice Department's Public Integrity Section to pursue. The Public Integrity Section recently obtained a felony indictment of one prominent fundraiser accused of using conduits to launder over $45,000 into a presidential campaign. Because of McCain-Feingold, he faces up to five years in federal prison if convicted.

Smith: Other than the ban on soft money contributions, McCain-Feingold made very few changes directly affecting political behaviour by corporations and trade associations. But for that very reason, it increased the importance of corporations and associations in the process, as campaigns look for new sources of funds. Corporations and associations should be vigorously soliciting for their PACs and also participating in additional legal activities outside of their PACs.

Editor: What are the prospects of the U.S. Congress imposing new campaign finance, ethics or lobbying requirements in the near future?

Kappel: We may see Congress tighten up the Lobbying Disclosure Act next year if it appears that ethics will be a significant issue in the 2006 campaign. I would be very surprised to see any significant campaign finance legislation enacted before the 2008 presidential election.

Smith: Pretty slim on the campaign finance front, at least for the next couple years. Congress is still trying to digest the McCain-Feingold bill. However, already in the sites of the groups lobbying for more campaign finance regulation are so-called "527" groups, and also 501(c)(3) and (c)(4) non-profits.

Editor: We hear a lot about the growing impact of the Internet on politics and fundraising. Will political activity on the Internet be regulated? Must corporations and trade groups at a minimum monitor their Web sites?

Smith: Unless a site is password protected and limited only to the restricted class, corporations and trade groups need to avoid expressly advocating the election or defeat of a candidate on their Web sites, or coordinating the content of Web sites with a campaign. Meanwhile, the FEC, pursuant to a court order, is considering new rules that could even restrict the ability of executives to use corporation-provided laptops, at home, for political emails. But at this time it is hard to predict just how far the rules will go. The FEC is scheduled to publish new rules early next year.

Editor: What are the key campaign finance/election law/ethics issues percolating in the states?

Smith: In the wake of McConnell v. FEC, which upheld the constitutionality of McCain-Feingold, I think we can expect many states to enact similar legislation. And remember: Any time campaign finance is put before the legislature or voters, corporate activity is a favorite target.

Kappel: We're starting to see a number of states and municipalities enact pay-to-play statutes that strictly limit campaign contributions by companies to state or local officials with the power to decide which companies receive government contracts. New Jersey, for example, passed a law that would ban companies from receiving state highway construction contracts if the company or its employees gave more than token contributions to candidates for governor. We may see more states adopt this type of narrowly-focused campaign finance statute and apply it to other sectors, such as financial advisors who manage either state pension or workers' compensation funds.

Published December 1, 2005.

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